VII. SPINOFFS

The scale of the automobile and AC power industries sucked whole congeries of other industries in their wake, most notably, the oil, aluminum, and steel industries.

The advent of cheap electrical lighting had doomed the kerosene market, the mainstay of the old Rockefeller Standard Oil. The court-ordered breakup of Standard Oil in 1911 was a boon for the company since it had clearly lost its mojo after the elder Rockefeller’s retirement.^* The old Standard was late to the fuel oil market, and missed out on major new oil finds in Texas, California, Oklahoma, Kansas, and Illinois that were exploited by new companies like Union Oil, Gulf, and Texaco. Military requirements and the explosive growth of the American fleet of gasoline-powered cars, trucks, and farm equipment forced the pace of technological development—high-powered airplane engines and machine guns needed top-quality lubricants, while new refining techniques like molecular “cracking” were key to meeting the demand for high-octane gasoline. By the mid-1920s, of the 30 largest oil companies, 21 controlled some 52–53 percent of total production, and there was considerable rotation of the 30 companies through the top groups, suggesting a very competitive industry.⁴³

The Aluminum Company of America, now Alcoa, was a monopoly, at first by virtue of its patented electrical method of smelting aluminum ore, and then by its extraordinary record in spotting and quickly dominating each next great market opportunity—moving quickly from cooking ware to automobiles and then to airplanes. It was also one of the first companies to take advantage of the vast new AC power complex that opened at Niagara in 1903. Andrew Mellon was an early investor and stayed close to the company. Henry Ford, with his fetish for lightweight cars, was the first to make wide use of aluminum in his industry, and he also made the aluminum cylinders in the World War I Liberty airplane engine. Aluminum was still a modestly sized company when the twenties opened, but its balance sheet expanded more than tenfold during the decade, vaulting it into the ranks of major American industrial players.^†44

The steel industry appeared in blooming health, benefiting not only from the automobile boom, but also from the rapid advances of steel-frame residential high-rises and office skyscrapers. Its economic performance, however, was dragged down by the near deadweight of the biggest company, US Steel. The great 1902 steel merger that created US Steel was essentially a defensive maneuver by J. P. Morgan to get Andrew Carnegie out of the steel business. J. P. Morgan had engineered roll-ups of a number of modestly sized end-product steel makers, most of whom bought their steel from Carnegie. Morgan went a step too far, however, when he organized an upstream steel maker to supplant Carnegie—fecklessly going head to head with the world’s most efficient steel manufacturer. Carnegie detested Morgan, and gleefully announced expansions aimed at destroying the Morgan entities. Facing catastrophe, Morgan engineered the buyout.

Morgan and his hand-picked US Steel corporation chairman, Elbert H. Gary, a lawyer, shared the belief that the primary purpose of a corporation was to reliably pay its investors their expected streams of earnings. Jostling for market position by stealing customers or undercutting prices was “destructive competition,” which would damage them all. US Steel controlled about 60 percent of the market, and Gary disciplined the industry by his famous “Gary dinners”—annual meetings of all the steel company executives at which they would reach a consensus on basic prices and individual shares. US Steel, under Gary, missed much of the boom in the automobile markets. It kept its plants in Pittsburgh instead of expanding to Michigan, and virtually all the breakthroughs in automobile steel—new alloys, continuous rolling, detailed chemical standards—came from the automotive companies, or from innovative entrants like American Rolling Mill Company (ARMCO). The Society of Automobile Engineers (SAE) specifications for automotive steel reached five hundred pages by 1920. US Steel played almost no role in the automotive industry, although dozens of other steel companies were involved, all of them small and innovative, and not likely to be invited to the Gary dinners. The steel historian Thomas Misa lists as one of the notable accomplishments of Morgan’s steel roll-up that it finally managed “to stamp out technical innovation in steel structures.”⁴⁵

In 1928, US Steel and General Motors were virtually tied for the leadership in sales among American companies—GM had revenues of $1.46 billion, while US Steel had pulled in $1.37 billion. But the similarities ended there. GM had a glittering 21.9 percent net profit on its assets, while US Steel, with roughly twice the plant and equipment as GM, much of it old and unproductive, returned a measly 4.7 percent on assets. The two companies’ returns on sales were similarly lopsided, 18.9 percent for GM and 8.3 percent for US Steel.⁴⁶